How Many Mutual Funds Should You Have in Your Investment Portfolio?

Time to take an inventory of your mutual funds. How many are there? What are their investment styles? Is your portfolio of mutual funds cluttered just like your closet? Have you owned some mutual funds so long that you have forgotten why you bought them? Are there some mutual funds on the top shelf, way in the back of your financial closet you haven't even looked at in a while?

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Adding new mutual funds to your portfolio is far easier than reorganizing your fund portfolio and discarding inappropriate, redundant, or simply poor-performing mutual funds. The answer to the question of how many mutual funds you should have in your portfolio is not just a number. But if you have many more than eight mutual funds in your closet, chances are you need to do some serious portfolio cleaning. Here's why.

First, in order to be well-diversified, your mutual fund portfolio should be invested in domestic and foreign stock mutual funds and in fixed-income mutual funds or income fund equivalents. Within the domestic stock market, your mutual funds should cover large stocks, small stocks, and stocks in-between.

Foreign investments should cover established firms in industrialized countries and stocks of countries that would be considered emerging markets. While geographic diversification domestically is relatively unimportant, diversification by region for foreign investments is. Representation in Europe for large stock international mutual funds is important, and investments in Latin America and the Pacific Rim are crucial when considering emerging stock mutual funds. Global mutual funds that invest domestically and abroad sound like a one-fund answer, but it is too much geography for one portfolio manager to cover and global funds tend to change domestic/foreign portfolio weights as world conditions change, neutralizing some diversification benefits.

Eight Is Enough…

Understanding the style and stock size characteristics of mutual funds will help prevent duplications and unnecessary run-up in the number of mutual funds in your portfolio. Now, back to our count of mutual funds: We left off at six with one fixed-income fund, or seven funds with two fixed-income funds. Add a money market fund and the counter clicks to eight. Be sure you can justify adding mutual funds to your portfolio beyond eight. Make certain you need them, that they truly cover new ground in asset type, geography, or investment style, and that the addition is meaningful.

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Taking the time to create an organized, understandable, appropriate and efficient portfolio of mutual funds may be your most important investment.

Discussion

Jeanette from CA posted over 3 years ago:

I have a mix of index (Vanguard) and active management---8 with Vanguard and a total of 12 funds - with addition of one Total Bond Market Vanguard and a money market fund..
The funds outside of Vanguard are American Funds and Templeton Global transferred to my IRA from 403B at work when I retired..and I did not pay commissions-- they provide more non-US exposure..

Our assets are over 1 million-??? does higher $ amount allow for more that suggested 8 funds????
- - our desire is to stay with funds (not individual stocks, for personal comfort)
As I am new to AAII- will there be a comment from the author or another reader on this question? thanks

Paul from CA posted over 3 years ago:

In my opinion the article reflects some good principles in keeping the number limited so the investor can keep better track of what is happening to their investments and to minimize overlap of fund objectivess. I am partial to Vanguard for their low expense ratios.

T Chiao from CA posted about 1 year ago:

Hi,
I have hard time to limit funds to 8. In fact I am seriously considering following professor Isaelsen's research using 12 as reported in:
WWW.7Twelve.Portfolio.Com
Welcome your comments.
TTC

James Smith from ME posted about 1 year ago:

Ric Edelman, "Rescue Your Money," lists an example of a truly diversified portfolio as having 16 different sectors and gives his supporting reasons for that number.

Paul Tichler from NY posted about 1 year ago:

Your advice about the benefits of active management vs. indexing is not borne out by my observations at least with regard to vanguard funds, There seems to be little difference in the long term performance in the midcap area. Also no mention is made of the small cap value premium which seems to persist over long time periods.

Bruce Ayer from Georgia posted about 1 year ago:

I've been running with 5 Mutual funds, 4 Index ETFs, 2 bond funds, and MSFT. The Mutual funds are long time top performers, the ETFs do even better, and MSFT is a low value whim.

Roger Bolger from Ohio posted about 1 year ago:

Our self-directed 503-B plan limits my choices to money markets, bonds (no listed term length nor issuer), foreign, large cap, small cap, a stock combination fund, various target funds.
I am currently in the small cap and money market about 50-50 as a will retire at the end of next year. All new money is going into the three stock funds. What should I do?

Justin Murphy from Connecticut posted about 1 year ago:

I have 5 Funds/ETF's for a mid 7-figure portfolio. Two Dividend equity (one Fund and one ETF); One Small cap index fund; One Intermdiate Corporate Bond ETF; and one High Yield Bond ETF. Both dividend equity investments have performed well, but I may migrate to just the ETF (once I'm convinced of it's long-term performance) to lower fees. That would leave me with four, which seems like too few, but there is plenty of diversification within each fund, and between the funds.

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